Bitcoin is both one of the most valuable and one of the most volatile individual assets on the market. At the time of writing a single bitcoin was valued at more than $13,650, up from a low of $5,000 six months earlier and down from its heights of nearly $20,000. For investors interested in this borderline unique asset, either as a currency or as an investment, bitcoins can be bought online, at an ATM and even in person. Here’s what you need to know about each of these options.
But first, a quick introduction to Bitcoin. It’s a virtual money or cryptocurrency that is created and exchanged independent of the banking system or government authority. Bitcoins are made through a process called “mining” that involves the use of computers to solve extremely difficult mathematical equations. Once the problem has been solved, the computer generates a specific number sequence that’s assigned to the bitcoin. Bitcoins get their value – which can vary drastically – based on supply and demand.
What Is Buying a Bitcoin?
A bitcoin is built on a database that uses a coding format called “blockchain.” Blockchain databases allow the user to store information in a secure manner that supports both public and private information. Put in other words, one of the unusual features of a blockchain database is that third parties can see the information stored in the database without being able to change that data.
A single bitcoin is known as a token. This token is not a physical asset. Rather, the Bitcoin database has recorded that a specific number of tokens exist. When you buy a token, the database then adds an entry to indicate that you now own this given token. So, for example, if you were to buy token ABC123, the database would then update so its record read:
- Token ABC123 Owned by Previous Owner
- Token ABC123 Previous Owner Transfers to New Owner
- Token ABC123 Owned by New Owner
Everyone in the world can see who owns Token ABC123, but the Bitcoin database will only allow the token’s current owner to transfer it (again, by editing the ownership information). When you buy a bitcoin token what you receive is that token’s private key. This is an alphanumeric string that allows you to access and edit the ownership of a bitcoin token. Like cash, whoever holds the private key of a bitcoin token functionally holds the token itself. If the key is stolen, you can’t stop someone from spending that token any more than you could stop them from spending a stolen $100 bill.
How to Buy Bitcoins
There are three common ways to buy and sell bitcoins.
Through a Website
The most common way to buy bitcoins, and any other cryptocurrency or blockchain token, is through what’s known as a cryptocurrency “exchange.” Exchanges are online marketplaces where people buy and trade cryptocurrency tokens. There are a large number of exchanges and most of them specialize in different aspects of this industry. For example, some exchanges will specialize in utility tokens (blockchain products designed to be used with a software network) while others will specialize in cryptocurrencies like Bitcoin (blockchain tokens designed exclusively as currencies).
For beginners, CoinBase is a popular and well-known cryptocurrency exchange on which you can buy and sell bitcoins. Robinhood, an online brokerage, also has a crypto component to its platform that allows investors to buy bitcoins. In October 2020, PayPal announced it would allow its users to buy and sell bitcoins.
Using an exchange is the most secure way that you can trade bitcoins. When you use one, you will first create what’s known as a wallet. Your wallet will hold the private keys that give you access to your bitcoins and other blockchain tokens. Different exchanges will give you different options for how to store your wallet, but the most common option is simply to keep the wallet stored on the exchange’s servers. You will then link up a payment method, typically through direct draft from a bank account.
It is still unusual for any cryptocurrency system to accept credit cards due to the legal concerns surrounding this issue. Doing so can constitute the use of debt to buy an investment product.
Finally, you will find and buy your bitcoins on the exchange’s marketplace. The purchase price will be deducted from your linked bank account and the private key granting access to your new coin will be stored in the wallet you created.
Through a Bitcoin ATM
At time of writing there are more than 9,500 bitcoin ATMs in service around the world. A standard bitcoin ATM allows you to buy bitcoins, typically either by using cash or a debit card. Some Bitcoin ATMs also allow you to sell your coins, but these are relatively unusual. A bitcoin ATM works similarly to purchasing on an exchange. You will select the number of bitcoins you’d like to buy, enter your payment and then receive your bitcoins.
Depending on the specific device, the ATM will ask you how you would like to receive the private key that gives access to your purchased bitcoins. Some allow you to enter the information for an online wallet, like those created on an exchange, while others may send the key to your e-mail address. Still other ATMs will even print the key out in hard copy.
Bitcoin ATMs are a relatively secure way to buy tokens in and of themselves, but given the nature of this product they often involve carrying large amounts of cash to or from a public place. For this reason it is often better to use an exchange when possible.
Buying bitcoin in person is extremely risky. We recommend against this method under ordinary circumstances.
Most bitcoin wallets are what is known as “hot storage.” This means that the wallet is kept online, on a server. Hot storage wallets have the downside that they are subject to the third party’s security. If the service providing your wallet gets hacked it’s much like if the bank holding all your cash gets robbed (only without the protection of an FDIC). However, they also come with tech support. If you misplace your login credentials, there are ways to recover access to your account.
Other wallets are kept in what is known as “cold storage.” This means that the private keys for someone’s bitcoins and other cryptocurrencies are kept offline. Some people will store this information electronically, using devices like a portable hard drive or even a flash drive to store the private keys which control access to their bitcoins. (As these are simple alphanumeric strings, even an extensive blockchain wallet can be stored in as little as a text file.)
Other people store this information in hard copy. In these cases the user will physically print off the alphanumeric key for their bitcoins or a QR code that can be scanned to produce the key. Then, if they want to access their bitcoins, they physically enter this key one digit at a time.
Cold storage has the advantage that it is unhackable. You can’t hack something that isn’t plugged in, and certainly not a piece of paper. However, the often-enormous downside is that it is vulnerable to human error. Simply put, it is very common for people to lose cold storage blockchain keys.
However, should you keep your bitcoin keys in cold storage, you can sell them in person. An in-person transaction would mean physically handing over the keys to the bitcoins you’ve sold and accepting payment in whatever manner you choose. This method works just as well as any others, but it is also highly insecure. It creates room for human error, loss and even (at extremes) theft. In-person transactions should be limited only to situations of extreme trust.
The Bottom Line
There are three main ways to buy bitcoins, one of the most well-known cryptocurrencies. Online exchanges are the most common and generally the safest options, but you can also buy them from dedicated bitcoin ATMs and through in-person transactions. Each of these options has its own advantages and risks so be sure you understand what those are and precisely why you are using any particular one of them.
Tips for Investing
- Whether you’re buying a safe and stable index fund or investing in high-risk, high-reward alternative assets like bitcoins, the best investments depend on sound advice. That’s where financial advisors can make a big difference. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s matching tool can help you find a financial professional in your area within minutes to make smarter decisions with your money. If you’re ready, get started now.
- Bitcoin is only one type of alternative asset that can be invested in. Other alternative investments include things like real estate, precious metals, rare musical instruments and fine art.
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